Your building should be insured for its rebuild value, what it would cost to construct the house again, not its market value, which is what you could sell it for. Insuring below the rebuild value can lead to a reduced payout (underinsurance); insuring far above it does not entitle you to more and simply means paying a higher premium than you need to.

Market value and rebuild value: what is the difference?

Market value depends on location, views, demand and the land itself. A sea-view villa in the Algarve can be worth far more than it cost to build.

Rebuild value (valor de reconstrução) is what matters for insurance: what it would cost today to rebuild the house with the same floor area, materials and standard of finish. The land is left out, because it is not lost in a fire or a storm.

That is why the two figures rarely match. In sought-after areas, market value is usually much higher. But the reverse also happens: older homes built with traditional materials and techniques, or in hard-to-reach places, can be expensive to rebuild relative to their sale price.

How rebuild value is worked out

The starting point is the built area multiplied by a cost per square metre suited to the type of house. With a villa, there is more to include:

Quality of finishes: stone, timber, bespoke kitchens, high-end windows.
Outbuildings and grounds: garage, guest house, pool, walls, gates, pergolas.
Installations: air conditioning, solar panels, home automation, irrigation.
Indirect costs: demolition, debris removal, architect’s and engineers’ fees, permits.

For higher-value or more complex homes, a professional valuation may be worthwhile. It is a small cost compared with the risk of being underinsured.

For a first reference, you can use the Property Rebuild Cost Simulator (Simulador do Custo de Reconstrução de Imóveis), provided by the Portuguese Insurers Association (APS). Keep your Caderneta Predial (property tax record) to hand: it shows the Gross Private Area (Área Bruta Privativa), which is the basis of the calculation in the simulator. If you prefer, send me the record and I will help you reach a reference value.

In Portugal, an Insurance Agent can advise, but the final decision on the sum insured always rests with the policyholder. I can make recommendations based on the details of your home, but I do not issue formal valuations. The simulator result is an estimate and does not replace an analysis of the specific features of the property. Contact me so we can look at your case.

Underinsurance and the average clause

You are underinsured (subseguro) when the sum insured is lower than the real value of what is insured. Portuguese insurance contract law (article 134 of Decree-Law 72/2008) says that, unless agreed otherwise, the insurer then only pays the loss in that same proportion. In English this is often called the average clause; in Portuguese, regra proporcional.

A simple example, with purely illustrative figures:

Real rebuild value: €400,000.
Sum insured on the policy: €200,000 (half).
Storm damage: €50,000.
Payout under the average clause: €25,000 (half the loss), before any excess.

Note that the loss was well below the sum insured, and the payout was still cut. Many people assume underinsurance only matters in a total loss. It does not: it also affects partial claims, which are by far the most common.

Some policies allow a tolerance margin or waive the average clause under certain conditions (for example, when the sum insured is calculated using a method the insurer accepts). This varies from policy to policy: check your conditions.

What if I insure for more?

Home insurance follows the indemnity principle: it puts you back where you were, it does not make you better off. If the sum insured exceeds the value of the property (overinsurance), you receive no more than the actual loss and you are paying too much premium. Insuring the house at market value, land included, is a classic example.

Keeping the sum insured up to date: ASF indices

Building costs change over time. For home insurance, Portuguese law provides that, unless agreed otherwise, the insured value of the property is updated automatically in line with indices published by the ASF (the Portuguese insurance supervisor). The ASF publishes these indices every quarter.

The insurer must also tell you, when the policy starts and at each renewal, the sum insured, how underinsurance works and how the value is updated. In practice, I recommend three things:

Check your renewal notice to confirm that automatic indexation is active.
Review the sum insured whenever you renovate, extend or build a pool: indexation does not capture these changes.
If the original figure was wrong, indexation only multiplies the error. It is worth revisiting the base value from time to time.

Common mistakes I see in policies

Sum insured equal to the purchase price, which includes the land and reflects the market, not the construction.
A figure set many years ago and never reviewed, despite renovations and extensions.
Outbuildings and pool left out, as if the policy only covered the main house.

Frequently asked questions

Can I use the tax value (VPT) as the sum insured?

It is not the right figure. The tax value (valor patrimonial tributário) is calculated on different criteria and rarely matches the rebuild cost. It can be a reference point, but it does not replace a proper calculation.

Does underinsurance also apply to contents?

Yes, as a rule it applies to anything insured. If your contents sum insured is lower than the new-for-old replacement value of your belongings, any payout can be reduced in the same proportion.

How often should I review the sum insured?

Whenever you carry out works or buy valuable items, and every few years even if nothing has changed. For a high-value villa, a regular review is good practice.

If you like, I will check whether your home’s sum insured is right, with no obligation: request your review here.

Sources

General information only. It does not replace reading your policy conditions or personalised advice.